BT 2010 Annual Report Download - page 133

FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
131BT GROUP PLC ANNUAL REPORT & FORM 20-F
FINANCIAL STATEMENTSADDITIONAL INFORMATION REPORT OF THE DIRECTORS REVIEW OF THE YEAR OVERVIEW
29. Retirement benefit plans continued
Sensitivity analysis of the principal assumptions used to measure BTPS liabilities
The assumed discount rate, life expectancy and salary increases all have a significant effect on the measurement of scheme liabilities. The
following table shows the sensitivity of the valuation of the pension obligations, and of the prospective 2011 income statement charge, to
changes in these assumptions:
Decrease Decrease Decrease
(increase) in (increase) in (increase) in net
liability service cost finance expense
£bn £m £m
0.25 percentage point increase to:
– discount rate 1.6 15 (15)
– salary increases (0.2) – (15)
Additional 1 year increase to life expectancy (1.0) (10) (55)
0.1 percentage point increase in expected return on assets – – 35
The sensitivities relating to the discount rate, inflation rate and expected return on assets in respect of the pension cost elements in the
income statement are shown for information only. The amounts that will be recognised in the income statement in 2011 are derived from
market conditions at 1 April 2010. Subsequent changes in market conditions will have no effect on the income statement in 2011 and will
be reflected as actuarial gains and losses in the Statement of comprehensive income.
Funding valuation and future funding obligations
A triennial valuation is carried out for the independent Trustee by a professionally qualified independent actuary, using the projected unit
credit method. The purpose of the valuation is to design a funding plan to ensure that present and future contributions should be sufficient
to meet future liabilities. The funding valuation is based on prudent assumptions and is performed at 31 December as this is the financial
year end of the BTPS.
The valuation basis for funding purposes is broadly as follows:
scheme assets are valued at market value at the valuation date; and
scheme liabilities are measured using a projected unit credit method and discounted to their present value.
The outcome of the latest triennial actuarial funding valuation at 31 December 2008 was announced on 11 February 2010, together
with the agreement between BT and the Trustee of the BTPS to a recovery plan to make good the £9.0bn funding deficit. Whilst the
valuation and the recovery plan have been agreed with the Trustee, they are currently under review by the Pensions Regulator. However,
the Pensions Regulator’s initial view is that they have substantial concerns with certain features of the agreement. BT and the Trustee
continue to work with the Pensions Regulator to help them complete their detailed review. The Pensions Regulator has indicated it will
discuss its position with us once they have completed their review. Accordingly, as matters stand, it is uncertain as to whether the Pensions
Regulator will take any further action. This uncertainty is outside of our control. Since the valuation date the scheme’s assets have
increased by £4.1bn and the Trustee estimates that if the funding valuation was performed at 31 December 2009 the deficit would have
been about £7.5bn on this prudent valuation basis.
The last two triennial valuations were determined using the following long-term assumptions:
Real rates (per annum) Nominal rates (per annum)
2008 2005 2008 2005
valuation valuation valuation valuation
%%%%
Discount rate
Pre retirement liabilities 3.65 3.06 6.76 5.84
Post retirement liabilities 2.15 1.79 5.21 4.54
Average increase in retail price index – – 3.00 2.70
Average future increases in wages and salaries – 0.75 3.00 3.47
Average increase in pensions – – 3.00 2.70
At 31 December 2008 the assets of the BTPS had a market value of £31.2bn (2005: £34.4bn) and were sufficient to cover 77.6% (2005:
90.9%) of the benefits accrued by that date. This represented a funding deficit of £9.0bn compared with £3.4bn at 31 December 2005.
The funding valuation uses prudent assumptions. In the three years ended 31 December 2008, the decline in the market value of assets
combined with longer life expectancy assumptions significantly increased the funding deficit, although the impact on the liabilities was
reduced by the higher discount rate and favourable experience compared to other actuarial assumptions used at 31 December 2005.
Following the agreement of the valuation the ordinary contributions rate reduced to 13.6% of pensionable salaries (including employee
contributions) from 19.5%, reflecting the implementation of benefit changes with effect from 1 April 2009, following the UK pensions
review. In addition, the group will make deficit payments of £525m per annum for the first three years of the 17 year recovery plan, the
first payment of which was made in December 2009. The payment in the fourth year will be £583m, then increasing at 3% per annum. The
payments in years four to 17 are equivalent to £533m per annum in real terms. Under the 2005 valuation deficit contributions were
£280m per annum for 10 years. In 2010, the group made regular contributions of £384m (2009: £433m) and deficit contributions of
£525m. No deficit contributions were made in 2009 as they were paid in advance during 2008.